Option Contract Specifications: Strike, Expiry, Style

Every option contract is defined by three critical specifications: the strike price, the expiration date, and the exercise style. These parameters determine the contract's payoff structure, pricing, and trading characteristics.

Definition and Key Concepts

Strike Price

The strike price (also called the exercise price) is the fixed price at which the option holder can buy (call) or sell (put) the underlying asset. Strike prices are set by the options exchange and typically follow standardized intervals.

For stocks trading between $5 and $25, strikes are usually spaced $2.50 apart. For stocks between $25 and $200, intervals are typically $5. Higher-priced stocks may have $10 intervals, though exchanges often add intermediate strikes for actively traded names.

Expiration Date

The expiration date marks the last day an option can be exercised. Standard equity options expire on the third Friday of the expiration month at market close. Weekly options expire each Friday, and some products offer Monday or Wednesday expirations.

Common expiration cycles include:

• Weekly options: Expire each Friday (or the last trading day of the week)
• Monthly options: Expire the third Friday of each month
• Quarterly options: Expire on the last business day of March, June, September, December
• LEAPS: Long-term options with expirations up to three years out

Exercise Style

American-style options can be exercised at any time up to and including the expiration date. Most equity options in the U.S. are American-style.

European-style options can only be exercised on the expiration date itself. Index options like SPX and NDX are typically European-style.

How It Works in Practice

Selecting a Strike Price

Strike selection involves balancing cost against probability of profit. The further out-of-the-money (OTM) the strike, the cheaper the premium but the lower the probability of finishing in-the-money.

Moneyness categories:

• In-the-Money (ITM): Delta typically > 0.50 for calls, < -0.50 for puts
• At-the-Money (ATM): Delta approximately 0.50 for calls, -0.50 for puts
• Out-of-the-Money (OTM): Delta typically < 0.50 for calls, > -0.50 for puts

Deep ITM options behave more like the underlying stock, while deep OTM options are highly leveraged but rarely profitable at expiration.

Choosing an Expiration

Longer-dated options cost more but provide additional time for your thesis to play out. Shorter-dated options are cheaper but subject to rapid time decay as expiration approaches.

Worked Example

Consider ABC stock trading at $150 on February 1. You are evaluating call options with different specifications:

Option A: Near-term ATM

• Strike: $150
• Expiration: February 21 (20 days)
• Premium: $4.50
• Delta: 0.52

Option B: Near-term OTM

• Strike: $160
• Expiration: February 21 (20 days)
• Premium: $1.20
• Delta: 0.22

Option C: Longer-term ATM

• Strike: $150
• Expiration: April 17 (75 days)
• Premium: $9.00
• Delta: 0.54

Option A breaks even at $154.50 ($150 + $4.50 premium). Option B breaks even at $161.20 ($160 + $1.20 premium). Option B is cheaper but requires a larger price move to profit.

For Option C, the additional 55 days provides more time for the thesis to develop, but at a cost of $9.00 per share versus $4.50 for the shorter-dated contract.

Risks, Limitations, and Tradeoffs

Strike Selection Risks

Choosing strikes too far OTM often results in complete loss of premium. While OTM options are cheap, they have low delta and require substantial price movement to become profitable. Many traders overweight the low cost without adequately considering the low probability of success.

Expiration Timing Risks

Buying options with insufficient time remaining is a common error. Even if your directional view is correct, the stock may not move quickly enough to overcome time decay. Conversely, paying for more time than necessary reduces capital efficiency.

Exercise Style Considerations

For option sellers, American-style options carry early assignment risk. This is most relevant for:

• Short calls on dividend-paying stocks near ex-dividend dates
• Deep ITM options where extrinsic value is minimal

European-style options eliminate early assignment risk but are only available on index products.

Common Pitfalls

1. Ignoring strike intervals: Some stocks have wider intervals, making precise strike selection difficult
2. Overlooking expiration timing: Monthly options expire at market close on Friday; index options may have different settlement procedures
3. Confusing AM and PM settlement: Some index options settle based on opening prices (AM settlement) rather than closing prices
4. Misjudging early exercise: Deep ITM calls on stocks approaching ex-dividend may be exercised early

Checklist for Contract Selection

• Verify the strike price intervals available for your underlying
• Confirm the exact expiration date and time (Friday close for most equity options)
• Determine whether the option is American or European style
• Calculate the breakeven price including premium
• Check the delta to understand probability and directional sensitivity
• Review open interest and bid-ask spread at your target strike/expiration
• Consider time to expiration relative to your investment thesis timeline

Next Steps

Understanding how strike and expiration affect option value requires grasping the relationship between intrinsic and extrinsic value. The article on Intrinsic Value vs. Time Value explains how these components combine to form the option premium.

For details on how call and put payoffs differ, see Call vs. Put Options: Payoffs and Use Cases.